Friday, January 23, 2009

Industrialization of China increases fragility of global food supply

This is something that is truly concerning. Policymakers have to address the greater than trivial chance that there will be a major crop failure sometime in the next decade.With grain prices down dramatically from last year's highs this would be a very good time to rebuild stocks of grain in storage. We've been beating this drum for a year, it's that serious.For more, see our links below.From EurekAlert:

Global grain markets are facing breaking point according to new research by the University of Leeds into the agricultural stability of China.

Experts predict that if China's recent urbanisation trends continue, and the country imports just 5% more of its grain, the entire world's grain export would be swallowed whole.

The knock-on effect on the food supply - and on prices - to developing nations could be huge.

Sustainability researchers have conducted a major study into the vulnerability of Chinese cropland to drought over the past 40 years, which has highlighted the growing fragility of global grain supply. Increased urban development in previously rich farming areas is a likely cause.

"China is a country undergoing a massive transformation, which is having a profound effect on land use," says Dr Elisabeth Simelton, research fellow at the Sustainability Research Institute at the University of Leeds, and lead author of the study. "Growing grain is a fundamentally low profit exercise, and is increasingly being carried out on low quality land with high vulnerability to drought."

The study looked at China's three main grain crops; rice, wheat and corn, to assess how socio-economic factors affect their vulnerability to drought. Researchers compared farming areas with a resilient crop yield with areas that have suffered large crop losses with only minor droughts....MORE

A small percentage decrease in Chinese crop output would cause a large increase in grain imports.

At the moment the Chinese government claims that China is 95% self sufficient in terms of grain supply. If China were to start importing just 5% of its grain (to make up a shortfall produced by low yields or change of land use to more profitable crops) the demand would hoover up the entire world's grain export.

When the United States went through industrialization it did so with a population that was approximately a tenth of China's 1.33 billion population today. Adding a fully industrialized China to the world demand for agricultural products and other resources is going to strain ecosystems around the world. I expect we will see a lot of species extinctions as a result. Lots more land will get shifted into agricultural production.

Watch that Pacific Decadal Oscillation. A New York Times archive search for the term "crop failure" returns 1950 hits, with a preponderance of stories written during the cool phase of the PDO. With the interconnectedness of the world's grain markets, a failure anywhere would raise prices everywhere....

...Here's the monthly PDO chart.You might want to look up the word famine. And store a couple tons of wheat in a vermin proof room. The risk of a major crop failure somewhere in the world over the next ten years just went up. My best guess (wild-ass variant) would be northeastern Russia/Ukraine. Which could get interesting:

...With the international financial institutions working on a slow track, countries have been cutting their own deals. Ukrainian President Viktor Yushchenko said on Tuesday that he had agreed to let Libya grow wheat on 247,000 acres of land in the Ukraine. In exchange, Libya promised to include the former Soviet republic in construction and gas deals.-Wall Street JournalApril 14, 2008 Page 1A

...Donald Coxe, chief strategist of Harris Investment Management and one of my favorite analysts, spoke at my recent Strategic Investment Conference. He shared a statistic that has given me pause for concern as I watch food prices shoot up all over the world.

North America has experienced great weather for the last 18 consecutive years, which, combined with other improvements in agriculture, has resulted in abundant crops. According to Don, you have to go back 800 years to find a period of such favorable weather for so long a time....

Just as cheap oil prices make this an opportune time to top off the Strategic Petroleum Reserve, cheap corn prices should be used to increase stocks in storage.